Risk of ruin
Definition · Level 8 · Risk & portfolio
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Probability that a run of losses shrinks the account to a level from which you cannot recover or must stop trading; it climbs steeply with bet size.
Example
Ten straight losses cost ~9.6% at 1% per trade but ~65% at 10% per trade.
Where Tradecraft teaches it
Level 8 · Risk & portfolio, in the lesson “Edge, expectancy & Kelly”: Measure edge as expectancy, see why a 40% win rate can win, and size bets with (fractional) Kelly.
Related terms
- ExpectancyAverage profit per trade: win% × average win − loss% × average loss.
- Half-KellyBetting 50% of the growth-optimal fraction: about three-quarters of the growth rate with about half the volatility, plus a buffer against an…
- Kelly criterionBet-sizing formula f* = p − q/b: the fraction of capital to risk per bet that maximizes long-run geometric growth, assuming a known edge and many…
- Payoff ratioAverage winning trade divided by average losing trade, in absolute terms; the b in the Kelly formula.
- 1RThe dollar amount at risk on a trade — entry-to-stop distance × size — used as the unit for measuring every result.
- AlphaReturn earned above what the asset’s market exposure predicts: Rp − [Rf + β(Rm − Rf)].